Crisis Explained - The Queen Gets Some Answers

by: Michael Panzner

Admittedly, I've expended a lot of ink -- or, rather, worn out a few keys on the computer keyboard -- railing against the incompetence and delusions of the mainstream forecasting crowd.

Not surprisingly, few of them have felt it necessary to answer to me or to the broader public for their failure to anticipate one of the worst financial crises this century and the first global economic downturn since World War II.

However, when Queen Elizabeth II starts asking questions about what went wrong, then it's not so easy for the experts -- at least those who live and work in the United Kingdom -- to ignore her or fob her off with a bogus response.

As it happens, their answers, as detailed by The Observer in "This Is How We Let the Credit Crunch Happen, Ma'am," acknowledge more professional culpability than I would have expected:

A group of eminent economists has written to the Queen explaining why [almost] no one foresaw the timing, extent and severity of the recession.

The three-page missive, which blames "a failure of the collective imagination of many bright people", was sent after the Queen asked, during a visit to the London School of Economics, why no one had predicted the credit crunch.

Signed by LSE professor Tim Besley, a member of the Bank of England monetary policy committee, and the eminent historian of government Peter Hennessy, the letter, a copy of which has been obtained by the Observer, tells of the "psychology of denial" that gripped the financial and political world in the run-up to the crisis.

The content was discussed at a seminar at the British Academy in June that was attended by economic heavyweights including Treasury permanent secretary Nick MacPherson, Goldman Sachs (NYSE:GS) chief economist Jim O'Neill and Observer economics columnist William Keegan. The letter explains that as low interest rates made borrowing cheap, the "feelgood factor" masked how out-of-kilter the world economy had become beneath the surface, with some countries, such as the United States, running up enormous debts by borrowing from others, including China and the oil-rich Middle Eastern states, that were sitting on vast piles of cash.